News

Scary Truth or Ghost Story: A Debt Ceiling and Government Shutdown Fact Check

The government shutdown is two weeks old and though piecemeal legislation reopened parts of government, many “nonessential” departments remain closed. Among the things that didn’t close, however, are politicians’ mouths. The shutdown and debt ceiling debate unleashed a tsunami of overhyped rhetoric. For investors, it’s crucial to separate fact from fiction—to determine what’s political rhetoric and what is factual. Here’s our effort to help—fact checking 13 of politicians’ common debt ceiling and government shutdown claims.

1. The White House has an infographic on its website titled, “The Dangers of Default.” The President and congressmen from both parties claim hitting the debt ceiling will trigger a default. The media frequently repeats this claim.

TRUTH OR GHOST STORY? GHOST STORY. Default is specific—in the US government’s case, it means missing a bond interest or principal payment. If the US government hits the debt ceiling, it will not automatically trigger default. Allthree of the ratings agencies—official arbiters of issuer default—have said as much.

2. But avoiding debt ceiling-driven default scenario requires using tax revenue to service debt—and the government said they can’t prioritize.

TRUTH OR GHOST STORY? GHOST STORY. According to a 1985 memo from the nonpartisan congressional watchdog, the GAO, the Treasury can prioritize payments if the debt limit is hit. The 14th Amendment’s Public Debt Clause (as interpreted by the Supreme Court in 1935) seemingly gives the Treasury little wiggle room —bonds must be a top priority of the government. Bonds can be issued to refinance the principal of maturing debt and the government’s monthly tax revenue far exceeds its monthly interest payments.

TRUTH OR GHOST STORY? GHOST STORY. Again, default is specific and addresses only bond interest and principal payments. Nothing else. Were it otherwise, the US government would be in default now—after all, the government isn’t paying some “nonessential” vendors and contractors today. And the government didn’t during the other 17 shutdowns since 1976!

TRUTH OR GHOST STORY? GHOST STORY. Actually, after paying bond interest, tax revenue is sufficient to cover Social Security, Medicare, Medicaid and Federal unemployment benefits with $600 billion left over to prioritize on other spending.

TRUTH OR GHOST STORY? TWO GHOST STORIES IN ONE! Spending decisions are made under budgets or continuing resolutions, not under anything related to the debt ceiling. The debt ceiling only limits the gross amount of US bonds outstanding. Moreover, the budget deficit isn’t rising fast. While final figures aren’t yet available, the Congressional Budget Office projects a fiscal 2013 budget deficit of $642 billion—a reduction of more than 60% from fiscal 2009’s more than $1.3 trillion deficit.

TRUTH OR GHOST STORY? GHOST STORY. While it’s possible investors’ fears are influencing Treasury bill rates, consider that stocks are up in the two weeks since the government shut down, and 10-year Treasury rates have been falling for most of the last month. Emotional wiggles in the near term are normal in markets. [i]

TRUTH OR GHOST STORY? GHOST STORY. The debt ceiling has frequently been used as leverage in political debates. In the 1980s, foreign policy,tax and budget policy were both affected by debates. In the 2000s, debates were often a means for politicians to posture for their base. (Here is just one example.) These are not atypical historically.

TRUTH OR GHOST STORY? GHOST STORY. There’s little to no evidence the US economy was impacted by the debate. The economy grew the quarter before, of and after the debate. Headline growth wasn’t quick before or after, but that was also in part due to rising imports (not economically bad) and government spending cuts weighing on headline GDP in every quarter of 2011. In Q3 2011, when the debt ceiling debate was ongoing, headline growth was 1.4%. Government spending and imports subtracted -0.5% and -0.8%, respectively. [ii]

TRUTH OR GHOST STORY? GHOST STORY. The longest shutdown on record, 1995-1996’s 21 days, did not materially impact GDP. Government spending fell -3.6% in Q4 1995, but GDP grew 2.9%. Maybe it would’ve grown faster had government detracted less, but that’s a different argument. And the present expansion has seen falling government spending in 12 of 16 quarters. [iii]

TRUTH OR GHOST STORY? TRUTH. In all likelihood, a US debt default would be quite bad. But, as alluded to above, talk of a debt default is overwhelmingly likely a ghost story.

13. Our politicians are incompetent!

TRUTH OR GHOST STORY? YOU DECIDE. But also not new.

By Todd Bliman

This constitutes the views, opinions and commentary of the author as of October 2013 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.

DISCLOSURE:
The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Can the Media Solve the Partisan Conflict?

Andrew McCarthy, Contributing Editor, The National Review; Michael Zeldin, CNN Legal Analyst; Celeste Katz, Senior Political Reporter, Glamour; Silvia Davi, SVP, Contributing Editor, Equities.com; and Doug Simon, CEO, D S Simon Media discuss how the media’s role has shaped the landscape for communicators and what the media is trying to do to reduce discord in society.

DirectView Holdings Inc designs and installs surveillance systems, digital video recording and services. The company through its subsidiaries operates within two divisions security and surveillance and video conferencing services.